Module 3 -

Financial Instruments

Financial Institution ·

facilitates exchange of money

Borrower Sauer
User Lender

Investee Creditor
T
Creditor

Financial Instruments
contract : one party /creditor transfer funds to another party (debtor Financial Institution COMMERCIAL
generates money ~
Money Exchange
~
Physical commodity
I
san be stock bond , ,
money market instrument , deposit currency derivatives
, , (borrower debtor,
, issuer, creditor) -

L
gives rise to

FINANCIAL ASSET
Bond vs . Stock -Receive Cash or Cash

"Interest ↓
Equivalent in the future
No assurance of principal repayment
L give back

the amount
invested CONTRACTUAL
of
FINANCIAL
Currency transferring
~
Funds INSTRUMENT
FLAT currency not backed by physical commodity
-

backed
~Stock bond , deposit ,

by government
,

assets of the
currency derivative
,

Financial Instruments -
Pro-forma
Cash XXY Financial Asset XXY
Asset side HISTORY OF MONEY PUTTABLE
Liability
Fin . Liabl XXX cash XXY ~
Barter : something Perishable ~
Recalled/Redeemed
Equity
~
Gold Silver ~
Right to exercise or not
-
gives rise to financial asset and liability ,

-
at least two parties

History of Money
·
Barter-only needs are used as exchange
-
valuable to
society
they need something
-

that should not perish

-
metals
-
gold-turn into coins , heaviest metal

Blacksmith-golds are deposited

-

(as money
-

give paper in return

-

Banks are local (Industrial revolution eral

~
FED-created the dollar
~
Different crorencies ,
different bank notes

Inventory
·
Toade Accounts are all Financial Instrument
·
Bonds -

recorded at FUPL FroCI , Amortized cost

,
Mr. A Mr B
.

-
~
Actively Traded
~
Marketable securities #

Financial Asset -

Receive Cash/Cash Equivalent in the Future

-Cash
~
Equity instrument of another evitity stocks
-

~
Contractual Right :
-

Receive cash / another financial asset from another entity

exchange financial assets/financial wh another entity with terms that are

-

To liabilities

potentially favorable
~
Contract that will I maybe settled in the entity's quity
instruments
own

a .
Non-derivative

b . Derivative that will or maybe settled other than by the exchange of a fixed amount of

cash.

Case 1 :

Mr. A company B

100 000 #oe

For
,

par
Case 2 :
Mr. A Company &

-
Total #100 = ,
000
FMV : # of
shares

Puttable Instruments
Can be recalled I redeemed
~
!

(callable shares)
~
Provisions under the stock certificate
Have the right to exercise the right or not